Margo Corporation is a major producer of lawn care products. Its stock is currently trading at $8 per share; there are 10.5 million shares outstanding. Margo also has debt outstanding with a book value of $400million. The required rate of return on the bond is 10% and the bonds are currently priced in the market at 90% of their book value. Assume the risk-free rate is 8%, the market risk premium is 9%, Margo's beta is 2, and its tax rate is 35%.
a) Calculate the cost of equity using the SML.
b) Calculate the weighted average cost of capital.